Management Accounting 2 Group Assignment

Topics: Depreciation, Net present value, Generally Accepted Accounting Principles Pages: 6 (1572 words) Published: March 18, 2013
Step 1:CA for a specialist machine
$ $
0 180,000
1 (180,000*25%)45000 135,000
2 (135,000*25%)33750 101,250
3 (101,250*25%)25313 75,937

Step 2:Calculation of Corporation tax
Year 1 2 3
$ $ $
Sales revenue 190,000 190,000 190,000
(-) Materials 70.000 73,500 77,175
(-) Labor 40,000 42,000 44,100
Operating cash flow 80,000 74,500 68,725
(-) CA 45,000 33,750 25313+75937=101,250 Taxable Profits 35,000 40,750 (32,525)
Corporation Tax@33% 11,550 13,447.5 (21,792)

Step 3:Calculation NPV
Year 1 2 3 4 $ $ $ $ Operating cash flow 80,000 74,500 68,725
(-) Tax - 11,550 13,447.5 0 Net Cash flow 80,000 62,950 55277.5 0 PV 67,797 45,210 33,644 0 Total PV 146,451 - Io 180,000 NPV= (33,349) NPV is negative, so reject the project.

The financial director’s approach to calculate the corporate taxes is different compared to that of the production director’s. The pre-tax profits of the two approaches are different which lead to different after-tax profits. The methods for depreciation are different. That is:

1. Their depreciation methods are different. Depreciation is the reduction in the book value of an asset due to usage over a period of time and this is also done to report the actual value to tax authorities. Straight Line Method——production director’s approach

This is the simplest, and most commonly used, form of depreciation calculation and refers to reduction of the value as per a constant rate. The depreciation value is calculated by taking the original, purchase, or historical price, less the scrap (or salvage) value, and dividing it by the useful years or the number of years that the asset would be in use in the business. The rate of depreciation remains constant as a fixed expense throughout the years. This depreciation method is useful for those assets in which the usage remains uniform or consistent. But, it does not take into account the fact that all assets do not deteriorate equally.

The straight line calculation is as follows:
Cost of Machine – RM180,000
Less Salvage Costs –NIL
Subtotal – RM180,000
Years of Useful Life –3 years
3 Years of Useful Life Divided by RM180,000 =RM60,000

Reducing Balance Method——financial director’s approach The reducing balance method allows considering a certain depreciation percentage to depreciate the machine rate annually. This method takes into consideration an accelerated rate of depreciation. This is useful for those assets in which a higher value is lost during the beginning years of usage. The only disadvantage of this method is it does not take into account the scrap or residual value of the asset. Here the reducing balance method should be used for fixed assets where useful life is only three years.

Compilation: The reducing balance method of depreciation is an alternative to the commonly used straight line (equal amounts each year) method. It is often used for tax purposes, but less often in published accounts. Rather than charging a fixed amount every year, a fixed percentage of the remaining value of the asset is charged every year. A RM180,000 asset depreciated at 25% a year will be depreciated by RM45,000 in the...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • AC4321 Management Accounting Case 2 Essay
  • Project Management Assignment 2 Essay
  • Essay on management principles assignment 2
  • Assignment In A Group Of 2 Essay
  • Group Genius Case 2 MetalCrafters Essay
  • Human Resource Management Assignment 2 Essay
  • Accounting Assignment Essay
  • Accounting Assignment Essay

Become a StudyMode Member

Sign Up - It's Free